Why can't Sharp climb out of the pit?

Recently, Sharp released its second quarter financial report for 2019, with revenue of 514.9 billion yen, a year-on-year decline of 4%, and net profit plummeting 35% to 12.5 billion yen. The operating profit in the second quarter plummeted 41% to only 14.6 billion yen, which is the first time that Sharp has seen a decline in operating profit in the second quarter since the acquisition.

It is understood that among Sharp's three major business groups, the profitability of businesses such as smart life is improving, but the operating profit of the main 8K ecosystem business plummeted by 54%, which is the key reason for the decline in performance. The reason is the decline in Sharp's LCD TV, panel and other businesses.

In addition, Korean media reported that Sharp will withdraw from the smartphone OLED panel market.

Faced with such a dismal financial report, it is almost forgotten that Sharp was once the "Father of LCD". From the most glorious "Father of LCD" to the current "maybe to withdraw from the smartphone OLED panel market", what ups and downs has Sharp experienced?

The Father of Liquid Crystal

Sharp was founded by Tokutsugu Hayakawa in Tokyo, Japan on September 5, 1912. Since then, Tokutsugu Hayakawa has led Sharp on the rise and created many "first" products in the home appliance industry.

Sharp developed Japan's first television in 1951, microwave oven in 1962, computer in 1964, the first electronic dictionary (or "electronic notepad", PDA) with Chinese character display function in 1987, the world's first 14-inch LCD monitor in 1988, ViewCam home video camera in 1992, the first water wave oven (Healsio) in 2004, and invented PCI ion that can resist H5N1 for air purifiers, air conditioners and other home appliances. Apple's handheld computer Apple Newton, which Apple began to develop in the 1990s, was also commissioned by Sharp to develop and manufacture.

It can be said that in the early days of LCD panel development, Sharp almost single-handedly promoted the popularization of LCD TVs. As the TV industry transitioned from the CRT era to the flat-panel era, Sharp developed rapidly in the first decade of the 21st century and once became a leading company in LCD TVs. For this reason, Sharp was hailed as the "Father of LCD."

With its leading strength in display screens, Sharp has embarked on a path of success. From black and white to color LCD, from 4-color technology to 4K ultra-clear, and then to 8K TV, its god-like technology has never stopped, leaving a strong mark in the history of LCD TV evolution with its strength.

From 2001 to 2007, Sharp became the global super-leader with its LCD TVs.

Miscalculation in 2008

However, just as Sharp was making great strides, history caught Sharp off guard.

Since 2008, due to external objective factors and its own operational reasons, the company's profits have been affected, and Sharp began to decline and has never recovered.

Looking through Sharp's 2008 financial report, we can see that due to the sharp drop in the prices of LCD TVs, the Sharp Group ultimately suffered a loss of 125.8 billion yen in the 2008 fiscal year (April 2008 - March 2009).

According to reports at the time, the reason for Sharp's huge losses in 2008 was that Sharp was hit by the capital market. "The global financial crisis hurt various industries at an unprecedented speed and scale, which was beyond our expectations," said Sharp's chairman and director Mikio Katayama at the time.

In addition, the most direct reason for the operating losses is the appreciation of the Japanese yen. As the Japanese yen appreciated sharply while the Korean won depreciated sharply during the same period, Japanese brands such as Sony and Sharp were also at a disadvantage in the competition with South Korean Samsung and LG Electronics in the European and American markets.

Third, in addition to the appreciation of the yen and investment losses, Sharp's daily operations also had problems due to losses in mainstream markets, especially the sharp decline in mainstream markets such as North America and Europe.

Faced with the crisis in 2008, Sharp launched a series of rescue measures, including laying off 1,500 temporary workers. Company executives also gave up bonuses and took the initiative to cut their salaries by 50%. At the same time, some panel production lines were closed. Through this series of adjustments, Sharp reduced costs by 200 billion yen in fiscal 2009.

However, such cost cuts are unlikely to fundamentally change Sharp's increasingly passive situation in the competition in the LCD TV market. Starting in the second half of 2008, its market share began to decline sharply due to insufficient investment in the Chinese market caused by losses in its global business and the collective counterattack of Chinese color TV manufacturers.

Foxconn's "White Horse Knight" Appears

Since 2008, Sharp has been in long-term losses and has begun to seek external financial assistance to get out of its operating difficulties. In 2016, it finally decided to introduce funds from Taiwan's Hon Hai Technology Group.

On August 13, 2016, Hon Hai Technology Group acquired 66% of Sharp's shares for 388.8 billion yen, making it a subsidiary of Hon Hai and the first large-scale electronics manufacturer in Japan to be acquired by foreign capital. At the same time, in order to reduce operating costs, the headquarters moved to the Sakai Factory in Sakai City, Osaka Prefecture.

The marriage between Sharp and Foxconn is also the result of mutual need.

On the one hand, Sharp was able to obtain funds from Hon Hai to get out of trouble. On the other hand, Hon Hai is the world's largest foundry company. As early as many years ago, Hon Hai hoped to transform and has been developing in various directions, and the LCD panel industry is one of them.

Hon Hai is the world's largest OEM for digital products. It needs to purchase a large number of LCD panels every year. Sharp is the world's second largest supplier of small and medium-sized LCD panels. Therefore, Hon Hai's acquisition of Sharp can further enhance Hon Hai's strength in the industrial chain. Hon Hai also covets Sharp's technology.

At that time, Taiwan's LCD industry technology lagged behind that of Japan and South Korea, and Sharp's IGZO LCD technology was seen as one of the technologies that could compete with Samsung's AMOLED technology. Hon Hai's Innolux already had a market share that could compete with Samsung and LG, but its inferior technology to them has always been a concern for Hon Hai. The acquisition of Sharp could solve this technical problem in one fell swoop.

Sharp Reform and "Tianhu Project"

Before Hon Hai invested in Sharp, Sharp's financial report was not optimistic. Sharp's financial report showed that its operating loss in fiscal 2015 reached 161.9 billion yen, an increase of 237% from the loss of 48 billion yen in fiscal 2014. Its consolidated net loss for the period was as high as 256 billion yen, an increase of 15% year-on-year. As of the end of March 2016, Sharp's debts were 31.2 billion yen more than its assets.

After the injection of capital into Hon Hai in August 2016, Terry Gou's trusted veteran Dai Zhengwu began to take the helm of Sharp. On August 22, 2016, Dai Zhengwu, who had only been in office for nine days, announced a series of reform strategies in Sharp's personnel, operations, supply chain, etc. after a two-day strategic meeting. Hon Hai's reform of Sharp also includes Sharp's revitalization of Sharp's TV business.

In 2017, under the leadership of Foxconn, the "Tiger Plan" was launched to expand Sharp's LCD TV market share, which led to a surge in sales of Sharp LCD TVs in China. The Sakai Display Plant (SDP, often referred to as the Sakai Factory) provided strong support for Sharp TVs, which also encouraged SDP's revenue to increase by 24% to 200.2 billion yen in 2017, breaking the 200 billion yen mark again, with a net profit of 4.3 billion yen, the fourth time it has made money in five years.

Since the beginning of 2017, Sharp TV has reduced its price by 30%, launching a fierce offensive against Chinese TV companies in the Chinese mainland market. In the first half of 2017, Sharp TV once ranked among the top four in the global TV market, while Hisense TV in mainland China experienced a significant decline.

Trapped in a price war

However, although the price war can make Sharp's sales soar in the short term and even regain a certain market share, the long-term low-price promotion has also seriously damaged Sharp. In the third quarter of 2017, Hon Hai's net profit fell 39% year-on-year. Coincidentally, Sharp's TV offensive slowed down in the second half of the year, while Hisense TV's market share rose rapidly. In the end, Hisense TV maintained its fourth place in the world's TV market for many years in 2017, while Sharp TV's shipments soared but it only ranked seventh, down several places from the first half of 2017.

The changes in the second half of 2017 have shown that Foxconn can no longer tolerate continued investment in the TV market. After all, Chinese TV companies have endured low profits for many years. It is reported that the net profit margin of China's TV industry was only 1.5% that year, which was lower than Foxconn's net profit margin. This highlights the fierce competition in China's TV industry. Foxconn, which has once again made efforts in the Chinese mainland market with Sharp TV, has naturally suffered losses in its performance.

Meanwhile, Hon Hai's Sakai Display turned from profit to loss in 2017, highlighting the enormous pressure it is under in developing Sharp TVs.

In 2018, Sharp TV did not launch a fierce price war again. Hon Hai began to support Nokia's mobile phone business instead. At that time, the Chinese mobile phone industry was already a red ocean. Although Sharp mobile phones had entered the Chinese market many times, they did not achieve outstanding results. In addition, although Foxconn is a giant mobile phone OEM factory, it has no obvious advantages in mobile phone brands and sales channels. For Sharp, its influence is still limited to the TV industry, and rebuilding its mobile phone brand may be a risky move.